Decentralization is a key tenet of blockchain technology. Cutting out middlemen and gatekeepers, and distributing responsibility for platforms’ security across many actors is a major reason blockchains have the potential to revolutionize whole industries such as streaming, gaming and, above all, financial systems.

But decentralization is too often more of an illusion than reality. Just ask Venezuelans, who this month found their access to their preferred digital wallet blocked. Like much of the crypto world, these users believed the Metamask wallet was a decentralized software. But they suddenly realized that a decision by a central player providing data to the wallet had decided to prevent activity in certain jurisdictions. Worse still, the move was apparently a mistake as the real target was intended to be Russian users.

The lack of decentralization at this application layer is problematic enough. But the whole premise of a decentralized technology empowering individual users falls down if the base layer protocols are highly influenced by a select few. The industry must urgently address this problem, especially because blockchains increasingly operate with a proof-of-stake mechanism. This system relies on token holders staking their assets to provide security to the base protocol. Does the world want to see a blockchain industry whose fundamental technology layer depends on a handful of actors with high staking capacity able to control the technology’s security?

To cite just a couple of examples: Solana, known for its transaction speed, has a super-minority of just 19 entities whose validation work secures the blockchain. Or, Terra, which has rapidly become a top proof-of-stake (PoS) network, has concentrated 40 percent of the voting power among just the top few validators. This centralization puts networks on thin ice when it comes to security, which can become an existential crisis for any PoS network vying for institutional and enterprise adoption in a crowded market.

For PoS to be successful at scale, we must achieve decentralization in staking to avoid putting platforms at risk of either manipulation by a single or a few actors or poor performance due to clustered or single points of failure.

Too much centralization can make a network falter if just a few core nodes go offline. If a network goes down because power is concentrated in too few nodes, it damages the brand’s reputation and reduces trust. And while the overall number of these validator nodes matters, so does the amount of tokens staked to each validator node. Ranking validators by total staked skews centralization to the same leading validators, just like Internet traffic goes to results on the first page of search results. This negative cycle only further centralizes staking to fewer validators and risks giving them total control over the very blockchain networks that are built for “censorship resistance.”

Beyond this threat of manipulation are technical concerns with a rising risk of instability and a lack of resilience to demand surges. Fewer nodes result in less transaction throughput and create the vulnerability that the impact on a network is worse when a large node goes offline.

Where do we go from here?

If the blockchain industry is known for one thing, it’s the ability to innovate. The issue of blockchain staking decentralization is no different. By focusing on staking diversification, the industry can improve the scalability, security, reliability and governance of its networks.

  • Scalability: PoS protocols need to reduce node centralization by making it easier for stakers to spread across multiple nodes – and not just a top tier.
  • Security : PoS protocols need to improve censorship resistance by making it easy to support smaller nodes, which in turn builds a more resilient network that resists corruption and censorship
  • Reliability : PoS protocols need to surface node performance metrics so stakers have more visibility into the quality of nodes, and can make informed decisions about supporting smaller nodes that perform well – and thus spreads voting power more evenly across nodes.
  • Governance: Consistent participation in voting is a core part of a healthy PoS ecosystem. Deprioritizing nodes that rarely participate in governance rewards participation as a core value in the node community

A balance has to be found between the need for decentralization and the demands of token holders and it is not possible with a one size fits all approach. We need to serve different segments of token holders to meet specific needs whether users seek the highest yield, security, convenience etc.

One way to serve those needs is to improve the user experience to boost validator visibility to facilitate stake diversification. Liquid staking, a relatively new form of incentivizing staking by allowing users to maintain liquidity while staking, encourages more people to stake their holdings. The result: greater participation in staking will then diversify control over networks.

Additionally, flexibility and cross-chain support is the key to supporting the next generation of staking infrastructure at scale. Providing convenience with cross-chain staking platforms that make it possible to stake across multiple chains in a single location will facilitate broader staking.

All this shows, the blockchain industry can keep to its decentralized ethos by pursuing the innovative spirit that has brought it so far. By seizing the right solutions now and diversifying staking, the industry will preserve the decentralization of its base layer protocols. That is good for blockchain, and good for a world looking to reduce its technological reliance on centralized controllers.

(Amit Gajjala is the CEO of Stader Labs)

The world needs to look for a decentralized solution for safe data storage and management. Pixabay